The race with China has been almost lost—but perhaps there is still a whiff of a chance to close the 10-year economic gap. Photo: AFP

Updated: Tue, Feb 05 2013. 06 11 PM IST

There has been ample bad news on the economy in recent months, thanks to the growth slowdown, high inflation, an investment crisis and the massive current account deficit.

Now, here is some good news: the size of the Indian economy will cross the $2 trillion mark this year, just five years after it became a trillion dollar baby.

There are two reasons why any celebration should be tempered with a dose of reality. One, the potential rate at which the economy can expand in the coming years without setting off an inflationary fire has been falling, thanks to the investment crunch. Two, what India has achieved pales in comparison with what China has done.

Some may say that the comparison is unfair, since the Chinese economic success has no parallels in human history. But China has been a benchmark to measure Indian progress, and benchmarking should always be against the best.

Two recent articles in foreign newspapers have led to renewed discussion on how the two Asian giants have fared. British historian Timothy Garton Ash recently spoke at Gateway House, a think tank in Mumbai. Garton Ash gave a civilizational spin to the issue. He said he was rooting for India because it could show that democracies can grow rapidly. The argument was repeated in his column in The Guardian.

A little earlier, Steven Rattner wrote in The New York Times: “Now the contest is emphatically over. China has lunged into the 21st century, while India is still lurching toward it.” He offered a lot of data to conclude that India has lost the race; it can only finish a respectable second in the race.

It is hard to disagree with this contention, but how big is the gap? One way of figuring this out is by comparing the two countries by size. The $9 trillion Chinese economy dwarfs the $2 trillion Indian economy on almost every count.

There is another way of looking at the race, by checking out how many years ago China was at the same level as India is today on a variety of parameters. This approach offers us some useful clues about how far behind India is right now. I have used data from the International Monetary Fund (IMF) and the World Bank. Some of the conclusions are surprising.

China was a $2 trillion economy in 2002. So India is 11 years behind China in the grand sweepstakes. Or, consider average incomes using purchasing power parity. Chinese average incomes in 2004 were at around the level that Indian average incomes are at now ($3,620). That is a nine-year gap.

The gap is narrower if we consider output per worker. The average Indian worker produces $8,401 of output a year, measured in 1990 dollars. China was at that level in 2006, not too long ago. The reason why the gap in terms of output per worker is less than that of average incomes is because China has a greater proportion of its population (especially women) in the labour force. The Indian labour participation rate is 56% versus 74% in the case of China.

Take a look at the consumption data. There is almost no difference between the two countries as far as mobile subscribers per 1,000 people is considered, but the gap is around eight years when one considers passenger cars. India currently has 12 cars per 1,000 people, a level that China crossed in 2004.

Poverty rates? The poverty headcount ratio—or the proportion of people living on less than $1.25 a day—in China in 2002 was around what it is in India today (32.7%).

So, one can broadly say that India is a decade behind China as far as the basic indicators of income are considered.

The picture is far less pretty when we look at social indicators.

For example, the proportion of Indians living in cities in 2011 (31%) was matched by China in 1995. The gap is similar when one considers access to improved sanitation. China is around 17 years ahead of India. It crossed India’s current rate of child mortality sometime before 1980 as it also did with energy use per capita.

A gap of 10 years is already a large one, especially given the pace at which the Chinese economy grows. Every percentage point growth differential in the coming years will make the gap between the two countries expand.

A lot thus depends on how fast the two economies will grow in the coming years. Investment bank Morgan Stanley believes that India will eventually outrun China. A recent IMF working paper says that the Chinese labour force will peak between 2020 and 2025, a Lewis Turning Point. The working paper is provocatively titled: Chronicle of a Decline Foretold.

The race with China has been almost lost—but perhaps there is still a whiff of a chance to close the 10-year economic gap. But one should not underestimate either the ability of China to overcome its newest challenges or the ability of India to add to its own woes.